See updated post on state alternative loan programs from June 29, 2010 here.
Disclaimer: Private student loans should be considered as a "last resort" only. Students and parents should access all other available forms of aid, including scholarships, federal grants (e.g., Pell) and federal loans (with names like Stafford and PLUS) before considering a private student loan.
I thought that headline might get your attention. First the caveats: The DEAL loan administered by the Bank of North Dakota, a state-run bank, is a variable-rate loan, so as interest rates increase it will too [DEAL also has a fixed-rate option which you will see described below]. Second, that 2.1% rate is available only if you are a resident of North Dakota OR attend an eligible institution in that state. If you attend an institution or your legal residence is in South Dakota, Minnesota, Montana, Wyoming or Wisconsin, then the starting interest rate is 3.1%.
With the recent flurry of headlines about students scrambling to cover tuition bills and a recent email from MEFA titled "Massachusetts College Loans Still Available," I thought it was worth reviewing state private loan programs that often fly under the radar screen.
What is there to like about them?
- Many offer a fixed rate structure which eliminates any worries that one might have about rising interest rates.
- Those that offer variable rate loans typically either have one variable rate for all loans they approve or a tight band in terms of the range of starting interest rates they offer.
- The variable rates and fixed rates on their loans are significantly below the average private student loan which SLA has estimated around 11%.
- While many of these loans require a cosigner that has become par for the course this year.
- Earlier SLA research found FICO cutoffs in the 660-700 range for those that disclosed this in their credit criteria.
- One thing to watch carefully is the repayment terms as several do require payments while a student is in school. While this keeps financing costs low over the life of the loan, it can be a difficult proposition in this economic environment.
I have separated the programs based on whether the loans are fixed or variable-rate. Two states, North Dakota and Texas provide lenders with an option so they show up on both lists. Note that almost all of the programs are available to residents of that state as well as out-of-state students who attend an eligible institution within these state. The exception is the Texas program, which is strictly for Texas residents only.
Here is a summary of the eleven states with undergraduate private loan programs and details about their current interest rates and fees based on a review of their websites earlier today:
Fixed Rate Loans
|State||Loan Name||Current Rate||Fees|
|Alaska||Supplemental Ed. Loan||7.30%||5%|
|Massachusetts||MEFA||7.75% - 8.89%||4%|
|New Jersey||NJCLASS||7.62% - 7.92%||2%|
|North Dakota||DEAL Loan
||5.99% - 7.90%||0-2%|
|Rhode Island||RI Family Ed. Loan
|Texas||College Access Loan||6%||3-5%|
|Variable Rate Loans|
|State||Name of Loan||Current Rate||Fees||Index|
|Maine||Maine Loan||8.43%||4%||MELA Bond Rate|
|Minnesota||SELF Loan||4.30%||0%||3 Month LIBOR + 3.5%|
|North Carolina||Extra Education Loan||7.00%||0%||3 Month LIBOR + 3.0%|
|North Dakota||DEAL Loan||2.1% - 3.1%||0-2%||3 Month LIBOR + 1.5% to 2.5%|
|Texas||College Access Loan||3.91%||3-5%||N/A|
|Vermont||VSAC Extra Advantage||5.19% - 8.19%||0-5%||3 Month LIBOR + 4.25% to 7.25%|
Here are some salient points that I thought were worth noting for each program along with a link to their website for additional information
- Offer borrower benefits (which may change annually) include a 0.5% rate reduction for borrowers who attend an Alaska school or live in Alaska while they are repaying their loans, a 2.0% rate reduction after 48 on-time payments and 0.25% rate reduction for direct payments from a bank account.
- Has the following announcement on their website: "As
of July 20th, you will be unable to print your promissory note until
the new bond money with a new fixed interest rate is
available approximately mid-August. Please continue with the
application process. You will be notified to print your promissory note
once funds are available."
- Previous rate was fixed at 6.99% with a 3% fee
- SLA Blog posted information about their bond offering in early August which was scheduled to close in early August.
- Chart will be updated when information becomes available
- Fixed rate on MEFA Loan varies based on repayment option selected; lower interest rate for immediate repayment
- The deferred repayment option (which carries a higher interest rate) is subject to fund availability and is awarded on a first-come, first-served basis and is subject to significant eligibility guidelines.
- Maine Loan requires interest-only payments during the in-school period
- Maine Loan's variable-rate is based on MELA's financing rates for the given year and is adjusted annually on June 1st
- Student or cosigner must have debt-to-income of less than 50% to qualify
- SELF Loan requires to make quarterly interest payments during in-school period
- The interest rate cannot increase or decrease by more than 3% in any 12-month period for this variable-rate loan
- New Jersey rates rise by .75% in year 5
- Fixed rate on NJCLASS Loan varies based on repayment option selected; lower interest rate for immediate repayment
- As SLA Blog posted in January of this year, the 2008 bond indenture for NJCLASS limited the percentage of borrower choosing the deferment option to 50% so if you want to defer be sure to move quickly
- North Carolina Extra Education Loan has minimum interest rate of 7%
- Offer 0.50% rate reduction for direct payments from a bank account
- Students from North Dakota, South Dakota, Minnesota, Montana, Wyoming or Wisconsin are eligible for Bank of North Dakota DEAL Loans
- North Dakota DEAL Loan fixed rates are 5.99% with no fees for North Dakota residents or out-of-state residents attending North Dakota schools; 7.9% and 2% fees for others
- RIFEL's 4% fee assessed at repayment
- RIFEL's loan repayment begins within 45 days of last disbursement
- Available to Texas residents only
- The variable rate loan is re-set annually and will never be higher than 4 points above the rate at which the loan is made
- Texas CAL loan fees vary based on credit standing of the borrower or cosigner
- Postponements of loan repayment and income-sensitive or graduated repayment schedules available
- Rates vary based on creditworthiness of cosigner
- Indicate clearly on their website that private loan should be avoided if possible: "For undergraduate students who need additional financing beyond the Stafford loan limit, VSAC strongly recommends that families consider a parent PLUS loan rather than a private loan in the student’s name."
I hope to incorporate this into the SLA Student Loan Ratings at a future date but wanted to make this available to the financial aid community ASAP given that families are making decisions now and may find this information useful as they seek options for private loans.